Viktor Shvets on Trump's Historical, Revolutionary Moves

Episode Summary

Executive Summary: The episode centers on Victor Schwetz’s view that Trump-era tariff and industrial policy is not conventional economics but a revolutionary effort to remake the U.S. and global system. He argues this is undermining U.S. exceptionalism, raising risk premia, shifting capital toward other markets, and potentially testing market, electoral, and institutional “breaks,” including the Fed’s independence.

Main Topics: Trump’s tariff shock and revolutionary goals (Priority: 5/5): Schwetz argues the administration’s tariff regime is aimed at remaking America and, by extension, the world, rather than pursuing standard economic policy. Decline of U.S. exceptionalism (Priority: 5/5): The hosts and guest discuss how markets are reassessing the assumption that U.S. assets deserve a persistent premium over other markets. Capital flows, deglobalization, and funding the new system (Priority: 4/5): The conversation explores how reshoring and deglobalization could require new pools of domestic capital such as pension funds and sovereign-style vehicles. Historical analogies: U.S. norms vs. rules (Priority: 5/5): Schwetz frames the U.S. as a nation of norms that can be disrupted by strong executive action, drawing parallels to Jackson, Lincoln, and FDR. Market stress, yields, and risk pricing (Priority: 4/5): The episode examines why Treasury yields rose during turmoil, whether risk is adequately priced, and how spreads could trigger broader freezes. Pain thresholds and political constraints (Priority: 4/5): Schwetz says policy durability depends on how much economic pain voters will tolerate and whether electoral checks force moderation. Federal Reserve independence under pressure (Priority: 4/5): The discussion ends with concerns that rising inflation and slowing growth could test the Fed’s independence if norms erode further.

Key Arguments: The Trump administration is not following a coherent orthodox economic theory; its actions reflect a desire to remake America, with different factions inside the coalition pulling in conflicting directions. Because the U.S. is governed heavily by norms rather than rigid rules, executive power can be rapidly expanded or norms broken more easily than in rule-bound systems. U.S. exceptionalism is weakening as investors begin to question why U.S. assets should trade at such a premium when policy uncertainty is rising. Higher tariffs and policy uncertainty could push inflation up while slowing growth, creating a stagflation-like bind for the Federal Reserve. If U.S. policy pushes toward deglobalization, capital may have to be mobilized through pensions, sovereign funds, and other domestic pools rather than foreign inflows. Market breakpoints still exist, but they are increasingly political and social rather than purely financial: electoral backlash, consumer pain, and institutional resistance. Treasury yields can rise in a crisis not only because of inflation expectations, but also because investors are liquidating positions and rotating out of U.S. assets. The U.S. may be entering a period where no country is viewed as truly exceptional, making cross-market relative value more important than the old “never bet against America” framework.

Data Points: Podcast report length: five minutes or less - Bloomberg’s Stock Movers promotional segment described at the beginning and end of the transcript. Tariff announcement date: April 2, 2025 - Referenced as “Liberation Day,” when massive tariffs were announced on virtually every country. Recording date: April 8, 2025 - Hosts note they are recording on April 8 while discussing market moves and Trump’s posts. Guest contribution date: November 27, 2024 - Victor Schwetz’s prior newsletter contribution saying “this time really is different.” 10-year Treasury yield move: from just below 4% to around 4.2% - Used to illustrate the unusual rise in yields during market stress. U.S. risk premium increase: from 2.5% to 3.5% - Schwetz cites inflation-adjusted risk premium on U.S. equities. Europe/China risk premium: about 6% to 9% - Compared with the U.S. to show how much higher perceived risk remains outside the U.S. U.S. equity valuation comparison: U.S. trades at 20x vs. China at 11x - Used to question whether the U.S. deserves a large valuation premium if exceptionalism fades. Triple-C high-yield spreads: 10% to 11% - Schwetz says these spreads are not yet enough to freeze the system but could become dangerous if they widen further. Average credit spreads: about 4.5% - He warns a rise to 6% would freeze both the global and U.S. economy. Potential inflation spike from tariffs: as much as 100 basis points or more - He says even reduced tariffs would likely still be inflationary. Projected PCE: 3.5% or more - Schwetz expects inflation to run higher through the year if tariffs remain elevated. Population share supporting radical change: about 30% - He estimates a large constituency accepts the idea that the house must be burned down to build the future. Additional affected swing group: up to 20% - He says another group may be driven by inflation, inequality, and immigration concerns.

Pivotal Quotes: "They want to remake America. They want to make it different to what it was before." — Victor Schwetz: Explaining the objective behind the Trump administration’s tariff and economic program. "U.S. is not a nation of laws or rules. It's a nation of habits. It's a nation of norms." — Victor Schwetz: Describing why executive power and institutional guardrails may be easier to disrupt in the U.S. than in Europe. "The idea is not whether you're fiscally spanned or not. The idea essentially is, what is the executive branch allowed and not allowed to do?" — Victor Schwetz: Arguing that the comparison to FDR is about expanded executive authority and government reach, not spending levels.

Implications: Investors should expect higher policy risk, more volatile capital flows, and a possible re-rating of U.S. assets. The episode warns that tariffs, inflation, and institutional strain could persist, pressuring the Fed and forcing markets to reassess what “safe haven” means.